The Conspiracy of Mutual Funds (May 2005)

Heather Larrabee

When someone says "Denver Broncos," we think of Jake Plummer. So why is it that when someone says Fidelity Magellan or Janus Worldwide, we don't think Robert Stansky or Jason P. Lee (the funds' managers)? After all, there are many players with the Denver Broncos, but there is only one player for Fidelity Magellan. Robert Stansky is responsible for Fidelity Magellan's performance. He's a one-man show. His decisions on what, where, when, how and why determine your investment's future. Period! I'm not saying that Mr. Stansky and other fund managers are hidden in the shadows from investors—these managers are revered and respected—but fund companies, the media, brokers, etc. seem to talk as if funds manage themselves. Why is that?

Could the answer be that past performance sells funds? The twenty-year annualized return is a strong selling point for Fidelity Magellan, even though the fund manager has only been managing the fund for a few years. What does the twenty-year performance of Fidelity Magellan have to do with the decisions the current manager is making today? Nothing. With this in mind, why is it legal to represent historical returns on funds when the current manager has nothing to do with those returns? Especially when you consider the Security and Exchange Commission's scrutiny on advertising. I can't count how many times I've seen ads for American Century Growth and Income and how it has out-performed the S&P 500 over the last five years. The current managers had nothing to do with this performance. They have only been managing the fund for a short time!

When fund managers leave, companies that offer the fund don't want the investors to leave with them. It's obviously financially beneficial for mutual fund companies to showcase funds instead of managers. What it doesn't explain is why the media at large promotes funds instead of managers.

Consider the fact that a full-page national ad in Money magazine costs over $100,000. Do you think fund companies might have some influence on the media's so-called "objectivity?"

I once asked an investor why he purchased the Berger 100 Fund. He said, "Bill Berger has been in the business for a long time and really knows what he is doing." I then informed him that Bill Berger didn't manage the fund anymore. This investor was at least looking in the right direction—at the fund manager. Unfortunately most investors buy past performance of funds and not past performance of managers. This is like betting on the car, not the driver, the racket, not the player, the arrow, not the archer.

The question should always be, "what's best for the investor?" William Randolph Hearst once said, "You should only believe half of what you read. The problem is which half to believe!" Keep that in mind the next time you see an ad boasting a fund's historical performance, and make sure you know which manager is steering the ship today.